PCAOB Adopts Rule Creating Interim Program for Auditors of Broker-Dealers

PCAOB Adopts Rule Creating Interim Program for Auditors of Broker-Dealers

June 30, 2011

The Public Company Accounting Oversight Board recently adopted a rule to create a temporary inspection program for auditors of broker-dealers, largely ignoring calls of lawmakers and the AICPA to require inspection only of auditors of broker-dealers who handle investor funds directly. While disappointed, the AICPA was not surprised by the proposal which won’t become final until 2013.

The PCAOB was given broad new authority under the Dodd Frank Wall Street Reform and Consumer Protection Act to expand its mission beyond auditors of public companies. Under the Act, the PCAOB has authority to set up an inspection regime for auditors of broker-dealers, and may choose specific classes of broker-dealer auditors or mandate that all auditors of all broker-dealers be subject to inspection and registration.

The AICPA supports PCAOB registration and inspection of auditors of broker-dealers with access to client assets, but does not believe inspections should be required of auditors of introducing broker-dealers where such inspections seem less likely to stop fraud. The AICPA does not believe that there has been sufficient due diligence or research to warrant regulating auditors of introducing broker-dealers as part of the interim program. The AICPA rather advocated for a study to determine the costs and benefits of such regulation. The AICPA believes that this new regulatory responsibility compels the PCAOB to balance the need to protect investors with the desire to avoid unnecessary and excessive regulation. Regulation without a clearly defined policy rationale will not help prevent future problems.

PCAOB Chairman James Doty and Board Members Lewis Ferguson, Daniel Goelzer and Jay Hanson each made statements during the proceedings indicating that they would be open to tailoring the permanent rule, expected in 2013, to include a more targeted class of broker-dealers in the final registration and inspection program. Each made remarks pointing to the need to analyze additional data from the pilot program before making a determination about the scope of the permanent inspection program.

The AICPA will continue to advocate for a final rule covering auditors of clearing, carrying, and custodial broker-dealers, since it is these broker-dealers that have direct access to investor funds and there is likely to be the biggest benefit to the public from additional oversight. The AICPA hopes the PCAOB will ultimately adopt a targeted final rule when it undertakes that rulemaking process.